March 4 (Bloomberg) -- France Telecom SA, Europe’s third- largest phone company, said full-year profit dropped 35 percent as it wrote down the value of goodwill and paid more tax.

Net income fell to 4.07 billion euros ($5.1 billion) from 6.3 billion euros a year earlier, the Paris-based company said in a statement today. Net income excluding items such as goodwill writedowns rose 14 percent to 5.2 billion euros.

France Telecom raised its dividend for 2008 and will keep a target of paying out at least 45 percent of its free cash flow, Chief Executive Officer Didier Lombard said at a press conference today. Based on the announced payout and the share price, France Telecom’s dividend yield is 9 percent, compared with 8.2 percent for Deutsche Telekom AG and 6.8 percent at Telefonica SA.

“The group provides one of the most generous returns to the shareholder in the sector,” Benjamin Rousseau, an analyst at CM- CIC Securities, said in a note today. “The outlook on 2009 and the medium term are likely to reassure investors about the group’s capacity to maintain cash generation at high levels.”

The annual dividend was raised to 1.40 euros from 1.30 euros in 2007. France Telecom has increased the payout each year since omitting it in 2003. In July, the company said it would split the dividend for the first time, making an interim payment of 60 cents in September, leaving 80 cents to be paid on June 30.

France Telecom rose 2.9 percent to 17.92 euros in Paris trading, trailing the 4.7 percent gain in the benchmark CAC 40 Index.

New Services

Sales rose 1 percent to 53.49 billion euros. Net income had been seen at 5.31 billion euros on sales of 53.4 billion euros, based on analysts’ average estimates compiled by Bloomberg. France Telecom cut its tax bill by 850 million euros in 2007, partly because of recognized deferred tax assets in France.

France Telecom is building up new services such as pay-TV to get more revenue from existing clients in mature markets and has expanded in Africa to gain subscribers.

“The year 2008 has been a year of very good operational performance,” Chief Financial Officer Gervais Pellissier said on a conference call. “Our growth is better than GDP growth in the countries in which we’re present.”

Sales growth in coming years will exceed average economic growth in France Telecom’s markets because clients are reluctant to give up their subscriptions and as phone services account for a minor part of household spending, according to Lombard.

Earnings Outlook

Full-year gross operating profit, a measure comparable to earnings before interest, tax, depreciation and amortization, rose 2.8 percent to 19.4 billion euros. Analysts had predicted 19.1 billion euros. Gross operating profit as a percentage of sales will fall “slightly,” Pellissier said.

The company’s writedown included 140 million euros to lower the value of the Spanish Internet unit, as well as writing off e- commerce businesses being shut down or sold, Pellissier said. The company also wrote down the value of its 20 percent stake in Portugal’s Sonaecom SGPS SA because the shares have slumped.

France Telecom said its goal is to maintain free cash flow at the 2008 level of 8 billion euros through to 2012. The operator had forecast full-year free organic cash flow of more than 7.8 billion euros.

Cost Measures

The company plans cost savings of 1.5 billion euros a year by the end of 2011, for example by reducing the costs of its computer-services centers, Pellissier said. “The full effect will be on the year 2012,” the CFO said.

There are no plans to cut jobs, other than through natural attrition, according to Pellissier.

France Telecom increased domestic mobile revenue by drawing subscribers to Apple Inc.’s iPhone 3G, for which it has been the exclusive French partner. The company last month lost a court bid to preserve the exclusive contract, after Bouygues Telecom complained about the deal in September.

Sales of the iPhone had totaled 810,000 units by the end of February, and a target of 1 million this year “is realistic,” said Louis-Pierre Wenes, in charge of the Orange wireless unit in France.

In June, the company ended a 244 billion-krona ($26.3 billion) bid for TeliaSonera AB after failing to agree on price. France Telecom bought assets in Kenya and Uganda last year to expand in fast-growing markets.

“We don’t foresee any transformative operation in terms of acquisitions,” Lombard said. “What we’re looking for is to buy assets where the value hasn’t been realized yet.”

Net debt fell to 35.86 billion euros at the end of December from 37.98 billion euros a year earlier.

France Telecom shares have dropped 10 percent this year, in line with the Bloomberg Europe Telecommunication Services Index.

To contact the reporter on this story: Rudy Ruitenberg in Paris at rruitenberg@bloomberg.net.

Last Updated: March 4, 2009 11:42 EST